Moody's Ratings says in a new report that Australian listed companies (carrying Moody's ratings) ended the June 30 fiscal year in good shape. They expect these companies (like BHP, Scentre, Dexus, Santos, Woolworths, Coles, Wesfarmers, Brambles, CSL, BlueScope Steel) to weather the economic slowdown.
Regarding key sectors, Moody's forecasts that natural resources companies will face a moderation in commodity prices but will maintain their capital spending plans. Iron ore prices fell below $100 a tonne for 62% Fe ore on Monday and Tuesday, following a brief increase last week. This weakness is expected to persist into 2025, as indicated by recent NAB forecasts.
However, Moody's is more optimistic about the sector than many local analysts. The report states, "Despite weaker margins due to declining prices and rising inflation-driven costs, rated companies will preserve their credit quality because of strong financial buffers. These companies typically operate at lower production costs, giving them an advantage as higher-cost competitors exit the market in the face of sustained commodity surpluses and lower prices. Over the next 12-18 months, we expect rated companies to invest in growth."
The property sector, however, remains a concern. Moody's notes that Australian real estate investment trusts (AREITs) will continue to face headwinds from weak office fundamentals, a weak consumer environment, and elevated debt costs.
"While operating performance was solid in fiscal 2024, due to positive rental growth, leasing spreads, and occupancy levels, interest coverage has deteriorated due to high interest rates. Most of our rated Australian REITs have limited headroom to our ratings tolerance levels. While there were significant asset value declines, particularly in office, capital management initiatives and low gearing levels have helped AREITs maintain gearing within policy ranges. AREITs will continue to face challenges over the next 12 months, including weak office fundamentals, soft consumption, and elevated debt costs," according to the Moody's report.
Moody's also stated that non-discretionary retail, airlines, and telcos will maintain credit quality. "The rated retailers reported solid full-year results, which aligned with our expectations and were broadly supported by continued sales growth. We expect they will continue to remain strongly positioned within their ratings bands over the next 12-18 months, reflecting resilient demand for consumer staples," Moody's said in the report.
